Nobody can force opensource code maintainers to build anything. More importantly, nobody can force all exchanges to run any particular code; exchanges can exist in any political jurisdiction.
Whilst way you say may technically be true, the government could just declare this:
Each person must publicly declare the bitcoin addresses that they hold. Any legitimate business accepting payment in bitcoins can only receive bitcoins from other registered addresses, else they are black flagged and no longer a registered address.
Now, your average business and the banks are not going to circumvent these rules. The Banks will probably give their business customers payment gateways that enforce these rules without the business having any choice. Black market bitcoins will still exist, they will just be useless as "normal" currency and will be completely separate, with no way to cross over. Since all transactions are public it is trivial for the government to enforce these rules.
You'll still be able to run your exchange in some other political jurisdiction, but unless the Government white lists your addresses, nobody will be able to spend those coins on legitimate businesses in your country.
Even if it was technically possible[1], I don't think it's any more feasible than forcing citizens to publicly declare the serial numbers of dollar bills that they hold.
[1] By design, Bitcoin addresses are supposed to be single-use. Reusing them is a security risk and not recommended (recent android vulnerability is a good example - it only affected reused addresses). Every transaction done with the standard client usually creates a new address (to send the change), which is not even visible in the interface. Merchants accepting Bitcoin usually create a new address for each invoice, etc. etc.
In other words, the way Bitcoin is used is fundamentally incompatible with the public declaration of addresses. If the government has the power to change this, it might as well make Bitcoin completely illegal and not bother.
It's trivial to make a wallet program that would report the new addresses as it makes them, one for each new transaction. That's really not a big limitation.
>Any legitimate business accepting payment in bitcoins can only receive bitcoins from other registered addresses, else they are black flagged and no longer a registered address.
This particular implementation wouldn't actually work. Anyone can send BTC to any address, so it would be easy to poison the well.
(But I suspect some similar scheme could be feasible. You might be able to enforce the rule on BTC->$ withdrawls? I wonder about mixers, though.)
This particular implementation wouldn't actually work. Anyone can send BTC to any address, so it would be easy to poison the well.
You could easily have software that would automatically turn over to the government any coins sent from addresses that are not registered. It's like if you found a briefcase full of money: you'd turn it over to the police (or maybe you wouldn't, but that's what you should do). With software, it could just be automatic.
If you refuse to run software that does this, or you don't turn over coins received from blacklisted sources within some period of time, you get blacklisted.
Except that because of ECC you will eventually leak your private key if you reuse the wallet for too long. So now you need to report every new wallet. Good luck with that...
The ZeroCoin extension to BitCoin has already been developed, but not implemented, to take care of this exact problem. ZeroCoin effectively destroys Bitcoins only to have them recreated in a new address with no connection to the originating address. These "transactions" have zero traceability (provided there are a few of them happening each block), thus the name ZeroCoin.
However, a government can probably make it very difficult to impossible to get money in and out of an exchange for it's citizens, if that exchange chose not to implement whatever features it requires.
